IHT avoidance schemes face scrutiny

The chancellor announced a range of measures yesterday to clamp down on tax avoidance, including schemes set up to escape inheritance tax (IHT) charges.

The threshold for individuals is also to be held next year at the current level of £325,000 per person, as had widely been predicted.

The government yesterday closed two loopholes used by UK tax payers attempting to duck the 20 per cent tax levied on transfers that exceed the IHT nil-rate band from individuals to trusts.

Stakes in offshore trusts that were previously exempt from IHT will in future attract tax.

Julie Hutchison, the head of estate planning at Standard Life, said that, at present, offshore trusts were often set up by an institution or an individual not domiciled or resident in the UK.

If a UK taxpayer then purchased a stake in that trust, it fell outside their estate for IHT purposes.

The favourable treatment of so-called flexible reversionary trusts, which are not used widely, has also been scrapped.

As part of the new measures to clamp down on tax avoidance, UK residents will also be obliged to tell the British tax authorities when they open certain foreign bank accounts.

The new reporting requirement will apply to UK residents opening accounts in “certain” offshore jurisdictions, with heavy penalties of up to 200 per cent of unpaid tax for those who fail to comply.

Accountants believe the new rule is likely to be applied in tax havens, such as the Channel Islands, a popular financial centre for UK residents.

The government also announced new measures to clamp down on people using domestic loopholes to avoid the so-called “mansion tax” on residential properties.

From April next year, accountants and others will have to disclose the use of schemes to avoid the 4 per cent Stamp Duty Land Tax levied on the purchase of homes valued at £1m or more.

Tougher penalties are also to be applied on those who fail to disclose to the Revenue that they have used a new scheme to avoid tax.

The move follows the chancellor’s announcement that the inheritance tax (IHT) threshold for individuals would be held at the current level of £325,000 as expected.

Small tweaks to the IHT regime also emerged, as the government signalled its intent to close the loopholes that were utilised by tax payers looking to duck the 20 per cent tax levied on transfers from individuals to trusts that exceed the IHT nil-rate band.

A course of action that is no longer permitted, according to Julie Hutchison, head of estate planning with Standard Life, is the practice whereby an institution or an individual who is neither domiciled nor resident in the UK sets up an offshore trust with a set amount of money, and then a UK tax payer purchases a stake in that trust. It used to be the case that the offshore stake these individuals acquired would not fall within their estate for the purposes of IHT. But this practice will be scrapped and tax must now be paid on such arrangements. The favourable treatment of so-called flexible reversionary trusts, which are not used widely, will also be ditched.

As part of the new measures to clamp down on tax evasion, UK residents are also to be required to tell British tax authorities when they open a foreign bank account.

The new reporting requirement will apply to UK residents opening accounts in “certain” offshore jurisdictions, says the government, with heavy penalties of up to 200 per cent of unpaid tax for those who don’t comply.

Tax advisers say the government’s measure follow ongoing efforts to clamp down on those sheltering gains overseas.

“Currently individuals are only required to report the interest from an offshore account at the end of the tax year,” says Richard Proctor, partner with Grant Thornton.

“But this new requirement means the Revenue will have information at the start of the process. It means tighter surveillance.”

Accountants believe the new rule is likely to be applied in tax havens, such as the Channel Islands, a popular financial centre for UK residents.

The measure comes as the government extended its deadline until January 4 for those with undeclared offshore assets come forward to pay tax, interest and a reduced penalty.

HMRC is gaining access to data from over 300 financial institutions on UK taxpayers with offshore accounts.

“Things are only going to get tougher for offshore account holders,” says John Cassidy, tax investigations partner at PKF. the accounting firm.

“Common sense dictates that anyone who has not declared their offshore account should now use the current facilities to get their tax affairs put right while it is still relatively cheap to do so.”

The government also announced new measures to clamp down on those using domestic loopholes to avoid the so-called “mansion tax” on residential properties.

The government is acting to tighten its regulations from April next year so that accountants and others are required to disclose if they use schemes to avoid the 4 per cent Stamp Duty Land Tax levied on the purchase of homes valued at £1m or more.

Tougher penalties are also to be applied on those who fail to disclose to the Revenue that they have used a new scheme to avoid tax.